Investing in Mutual Funds Involves Risk
Common Risks involved in Mutual Fund plans
- Regular market risks.
- There is a security risk.
- Liquidity loss.
- Returns not guaranteed.
- Impact of inflation.
- Risk associated with loan financing.
- Non-compliance is a risk.
- The risk of mismanagement by the manager.
Let’s look at how market and economic fluctuations affect your mutual fund returns. We’ll look at long-term and short-term investment situations to see how effective your investment is.
Mutual Funds Actual Earnings
1. Suggested Earnings Might Fail: You might not get what you were promised when you invested. Guarantees are breached when dealing with uncontrollable circumstances. If the company in which you have invested fails, for example, you may lose all or part of your expected earnings.
2. Inflationary Impact: You obtain what you were promised, but owing to rising inflation, your investment is now worth less than you anticipated. Your money loses more purchasing power than you anticipated. For example, in the 1980s, high-calibre (i.e., “protected”) businesses were issuing long-haul bonds that paid roughly 4% interest. At the time, such bonds appeared to be a reasonable investment because the average cost of essential goods was only increasing by 2% each year. However, when growth accelerated to 6%, 8%, and then 10% and greater, those 4% bonds didn’t appear to be as attractive.
Get more info: The Risks of Investing in Mutual Funds
To further comprehend it, let us use a real-life example. Assume you invested INR 50,000 in a 4-percent-yielding 18-year investment plan. You planned to use it to pay for a year of your son’s schooling in 18 years. University fees increased by 8% per year during the investment period. You have no further investment but just INR 50,000 when you consider using the earnings for school; hence, one year of university education would cost over INR 200,000 in 18 years when you need the money. Regardless, your investment would only be worth roughly INR 100,100 if it yielded only 4%, leaving you about 50% short of your projected tuition fees.
3. You do not obtain actual profit: You are not a part of the company’s success in which you put your hard-earned money. The increase in assets, valuation, and development is beneficial to the company and its early owners and founders if the company grows in size and benefits. As a bondholder, you are a small time money lender who is guaranteed to recover your benefit and principle amount back, but you do not receive any of the original benefits proportionately received by the owners. You will not receive the profit that your investment is truly worth.
What is the best way to deal with these situations?
Pulling out the original investment and rolling back the interest amount in future investments is the best thing a prudent investor can do. As the fund’s dividends and other interest are declared, you can use it to buy minimal shares in the mutual fund and then withdraw your actual investment after earning a profit. As a result, your initial investment is protected, and future growth is contingent on the amount of interest received. To help you grasp earnings, you should utilize a compound interest calculator.
Get more info: Mutual Fund Types and Common Misconceptions
